Gold : 12 reason to short gold

If you’re a self-professed “Goldbug,” feel free to read no further.Or at least spare me your hate mail. Because no matter what I saytoday, I know you’ll cry foul… or something much more colorful.

But for those of you with an open mind – especially after my lastthree contrarian predictions proved dead accurate, read on.

Because it’s time to start shorting gold!

You won’t find many, if anyone else, making this case. But as thefirst reason of 12 below reveals, that’s precisely why you should giveit more credence.12 Reasons To Start Shorting Gold

It’s decidedly contrarian. If a contrarian investor is someone whodeliberately decides to go against the prevailing wisdom of otherinvestors, shorting gold certainly fits the bill. Right now, everyoneelse is buying gold, or at least recommending it. If you have anydoubt we’ve reached such fever pitch levels, consider No. 2.

The infomercial factor. The best indicator of a turning point for anyinvestment, in my experience, is infomercials. If an investment getsso popular it invades the pre-dawn hours with non-stop but-wait-there’s-more offers, it’s time to get out. And that’s exactly what’shappening now. So much so companies like Cash4Gold.com are invadingprimetime television. They even splurged for a Super Bowl ad spot. Andthey recruited washed-up celebrities Ed McMahon and M.C. Hammer toboot. In case you forgot, the Hammer filed bankruptcy in 1996. AndEddie boy almost lost his 7,000 square-foot, $6.5 million BeverlyHills pad to foreclosure. No offense, if you take investment cues fromthese two, you deserve to lose money.

There is always some truth in a rumor. Recent news reports suggestedGermany, the world’s second-largest holder of gold, was selling somefrom its vaults to trim its deficit. It turned out to be a rumor. Butyou gotta wonder if there’s some truth behind it. After all, high goldprices would be an easy way to raise cash. In other words, thescenario is completely plausible. And if Germany’s considering it,even remotely, so, too, are plenty of other deficit-riddengovernments. It goes without saying that a government dumping supplyon the market will send prices lower, quickly.

The gold-to-oil ratio is out of whack. Historically, an ounce of goldwill buy you about 14 barrels of oil. But with oil around $40 perbarrel, an ounce of gold gets you almost 23 barrels – a whopping 64%above the historical mean. If you believe in statistics, a reversionto the mean is imminent!

So is the gold-to-silver ratio. Historically, an ounce of gold willbuy you 31 ounces of silver. But now the ratio stands at 73 – anunbelievable 134% above the historical mean. Here, too, a reversion tothe mean is imminent. And I’d rather place my bets on a 57% decreasein the price of gold, than silver more than doubling to make ithappen.

The HGNSI index is too high at 60.9%. For the past 25 years, HulbertFinancial Digest has tracked the average recommended gold marketexposure among a subset of gold-timing newsletters. It usually fleshesout around 32.6%. But now it rests at 60.9%, a level it’s onlyexceeded 13% of the time. The key – Hulbert found an inversecorrelation exists between his proprietary index and the short-termmarket direction of gold. In other words, if the index is high, likenow, gold is headed lower.

Trinkets drive demand, not governments or speculators. Nearly 75% ofgold demand comes from the jewelry market. And if Indian brides balkat buying above $750 per ounce as the Bombay Bullion Associationreports – India’s gold imports cratered 81% in December – look outbelow. And don’t be fooled into thinking investors (governments orspeculators) will pick up the slack. As HSBC reports, rising demandfrom investors, particularly from ETFs, only offset half of the 33%decline in jewelry market demand since 2001.

What makes now “different?” If the global economic crisis keepsgetting worse, as goldbugs like to point out, why hasn’t gold testedlast March’s high of $1,030.80 per ounce? Or blown right by it? Afterall, gold is supposed to increase in value as economic conditionsworsen. But it hasn’t lived up to expectations, not one bit. And Idon’t think it ever will. Ultimately, when you factor in the massiveamounts of stimulus being injected into the markets, on a globallevel, we’re close to the worst of times… and the peak for gold.

Analysts love it. According to Bloomberg, 16 of 24 analysts surveyedby the London Bullion Market Association believe gold will reach aminimum of $1,032 per ounce this year. As we all know, analysts’ trackrecords are deplorable. Instead of just ignoring them, why not betagainst them? The odds are definitely in our favor.

Hedge fund buying dried up. Institutional speculators (hedge funds)played a large part in gold’s run-up. But 920 of them went Kaplooeylast year, according to Hedge Fund Research, Inc. Not to mention,hundreds of others hemorrhaged capital as investors demanded theirmoney back, while those left standing ratcheted down borrowing toclose to nothing, according to Rasini & C., a London-based investmentadviser. In the end, gold prices will eventually reflect the absenceof these former heavyweights.

Gold is schizophrenic and the wrong personality is in control.Multiple motivations exist to buy gold including the desire for a safehaven, currency, adornment, raw material, or inflation hedge. But muchlike Treasuries, the bulk of buyers come from the safe haven camptoday. And once the economy shows any signs of perking up, we canexpect these same investors to flee for more risky assets. And don’tbe so quick to rule out a second half recovery…

The Fed, the President, history and the Baltic Dry Index concur – theeconomy’s on the mend. Despite dismal data, both the Fed and PresidentObama point to the current recession ending by the second half of2009. Moreover, the average recession only lasts 14.4 months. So evenif this one is longer than usual, we’re still near the tail end of it.A fact underscored by the recent 61.4% rally in the Baltic Dry Indexfrom its early December low. As I wrote in November 2008, the index isthe first pure indicator of an uptick in global activity. And once theeconomy gets back into gear, the Fed will act quickly to reign in themoney supply and curb inflation.Cleary the gold rush is on. But that’s all the more reason to move inthe opposite direction, against the herd. I realize this might be themost unpopular recommendation right now, but that means it could alsobe the most profitable.

And before you brandish me a fool for recommending shorting Treasuriesand gold in the span of two months, here’s the intersection. Thedriving force behind both assets in recent months has been safe havenbuying. And it will remain the dominant variable in determining pricein the months ahead. So when investors go back on the attack for morerisky assets, prices for both assets will fall.

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